In this series, Rudyard Griffiths, chair of the Munk Debates, Canada's leading public-affairs forum, discusses issues and trends just over the horizon with renowned analysts and policy-makers.
Why do you think this is one of the more momentous years in the history of oil?
For the last 10 years, the theme that dominated the oil market was Chinese economic growth and China's need for oil. We then saw a switch to something that people didn't expect, which was the incredible surge in North American supply. U.S. oil supply is almost double what it was in 2008, and growth has continued in Canada.
This historic change was matched by a second once-in-a-generation development: the decision of Saudi Arabia not to cut production to support the price. The Saudis have, in effect, said to America and the world: "You like the market, let the market decide."
What drove Saudi Arabia's decision to allow the price to fall?
It's a mix of things but, primarily, there's one central consideration: market share. Saudi Arabia saw that it would have to cut, and cut again, its production to support higher prices in the face of new North American supply. The kingdom's refrain is: Why should low-cost oil subsidize high-cost oil? Obviously, they're thinking here, among other things, about Canadian oil sands.
There's a far-fetched theory that somehow the Obama administration and Saudi Arabia got together to bring down the price of oil in order to hurt Russia, but I don't believe it. If there is a foreign-policy objective at work here, it is the negative effect lower prices have on Iran, which is Saudi Arabia's great regional rival. Saudi Arabia does feel that it's increasingly surrounded by Iran and its allies.
How big a factor is China and its slowing growth in terms of where oil prices are headed?
While Chinese demand will continue to have a significant impact, it is not clear that this demand will continue to grow at the rate it did in the past. For example, China, right now, is the world's largest automobile market. But when the Chinese buy cars, the traffic is so terrible, they end up driving them only two days a week. I think the interesting question is, what will be the impact of greater energy efficiency on oil prices? We are going to see significant numbers of electric cars in China in the next 10 years. In terms of both the consumption and production of energy, I have every expectation that technology will continue to be a game changer, both in terms of demand and supply.
Given this "historic" surge in U.S. production, are we looking at permanently lower prices?
The new buzz phrase is that the U.S., rather than Saudi Arabia or the Arabian Gulf countries, is the "swing producer." This is because, instead of having big, mega-multibillion-dollar investment decisions determining the future price of oil, you have hundreds and hundreds of people making "micro" decisions on whether to drill a $10-million well. This dynamic means that supply goes up fast and, boy, it went up faster than even the most bullish analysts predicted. Now, we are looking at levelling off or even a decline in U.S. production – but, remember, supply can turn around again, and fast. When prices come back, wells that were drilled but not completed will come into production. I think all this leads to an extended period of more volatile prices.
What is the fate of the oil sands?
The oil sands' are among the higher-priced new barrels to bring to market. When we look at the numbers, we actually see substantial new oil-sands production coming on line over the next few years, possibly as much as another 800,000 to a million barrels a day. The result of these factors and forces is that people are going to be very cautious about new investment decisions, and take a wait-and-see attitude.
What advice do you have for the New Democratic Party's new government in Alberta?
Look forward and not back. It has to anticipate a world in which powerful producers in other parts of the globe are striving to reduce, or drive out completely, higher-cost producers – of which the oil sands are at or near the top. They need to enact realistic policies that are based on where the market is today and the very real economic pressures that Canadian oil is under, pressures which could become even greater because of the transportation bottlenecks to U.S. and overseas markets. In sum, they need to be very careful not to damage an industry that is crucial to the economic well-being of Alberta.